During SEPTEMBER 2014, this thread will be regularly updated with more-up-to-date information as well as links to recent Fatwallet discussions. -SN

Q1. SN, could you briefly describe what an IRA is?A1: An IRA is a contractual arrangement between three parties:(a) You (a U.S. person and taxpayer who earns taxable income from gainful employment);(b) Uncle Sam a/k/a the Internal Revenue Service; and(c) an IRA custodian which you choose to hold the assets of your IRA Account, typically a stock broker, bank, credit union, or mutual fund company.

Q2. What do you mean by "contractual relationship?"A2. An IRA involves a lot of special paperwork which has to be signed by you and an officer of your IRA custodian and submitted to the Internal Revenue Service. Uncle Sam requires these documents to be completed in order for you, as the taxpayer, to receive the tax benefits of an IRA. For the financial institution, opening and maintaining IRAs is more complicated than opening a standard brokerage or deposit account.

Q3. What's a Traditional IRA? What's a Roth IRA?A3. Both of these are "arrangements" you make to invest money towards your retirement. A summary of each follows:(a) Taxpayers contributing to a Traditional IRA typically may deduct some or all of their annual IRA contribution directly from their taxable income. For many taxpayers, this may also provide a cut in their marginal tax rate - BUT Congress has deductibility phase-outs affecting taxpayers who work in a job where they are covered by an employer pension or 401(k) plan. Beware of this trap. Contributions within the Traditional IRA grow on a tax-deferred basis, and only are taxable by Uncle Sam (and most states) at the time funds are withdrawn, typically in retirement.(b) Taxpayers contributing to a Roth IRA receive NO tax deductions for their annual IRA contribution. However, contributions within theRoth IRA grow on a tax-exempt basis, based on the current tax laws which would allow all earnings to be withdrawn in retirement free of tax liability.CAUTION: Current tax laws suggest that Roth IRA assets can grow totally exempt from taxation. What cannot be predicted with certainty is whether or not a future U.S. Congress changes the tax-free status of funds within an IRA. Based on numerous past U.S. Supreme Court rulings, the United States Constitution does not prevent Congress from changing the Internal Revenue Code such as to tinker with the tax status of either Roth or Traditional IRAs. Ultimately, we can only make our decisions based on the present - and personally I am not going to lose sleep over what "might" happen, and I will be making annual Roth IRA contributions. However, if you as a taxpayer need the immediate up-front tax deduction in order to make a full IRA contribution for the year, then the Traditional IRA is certainly better than making no IRA contribution at all.

Does anyone know of IRA providers who allow you to purchase U.S. Savings Bonds (Series I or Series EE) within the IRA account?

Savings Bonds have been heavily discussed as a relatively high-yield, low-risk investment. However, I haven't found stockbrokers offerering Savings Bonds and my impression is most bank/CU IRAs don't accommodate US Savings Bond investments.

Has anyone found a way to invest in U.S. Savings Bonds within their IRA?

IF you find a bank that is willing to do this, the bonds will be registered under your own SSN but with the names of both yourself and the bank's (trustee/custodian). The bonds will be sent directly to the bank.

The bank will also have to fill out PD F 5374-1: ORDER FOR SERIES I US SAVINGS BONDS TO BE REGISTERED IN NAME OF FIDUCIARY

My guess is the big banks would not take the trouble to do this for retail clients; just look for a bank that accepts savings bonds as IRA investments.

SN, I know there must be something I'm missing but why do you want to invest savings bonds in an IRA, ROTH right? These bonds are 1) already state tax exempt, 2) tax deferred. The only positive of having a bond in IRA is not paying federal taxes on the deferred income. I would want to invest in BOTH IRA and savings bonds and have a farther reach on tax deferred investments. Also insurance cash value is another tax deferred vehicle.

For all the talk about ROTH, I still personally prefer traditional, although maybe it is safer to do a little of both (in terms of a tax hit at mandatory 70-1/2 withdrawal, thanks Sasha5 ). Take the example of an investment similar to savings bond which is earning less than 5% interest, by sheltering in ROTH you will EXEMPT (your ordinary rate x 5% interest per year), but if you do traditional IRA, you will DEFER (your ordinary tax rate x savings principal 3K/yr). Which is a better savings??? Now I'm not sure, so I should rethink my preference for traditional.

...Seems they are exactly the same:

For Roth: I will be saving approximately .5-1.9% (ordinary rate x 5%) on 3K/year compounded. 3K x .5-1.9% = $15-57

For Traditional IRA: I can defer $300-1158 (10-38.6%)of 3K/year, which if invested at 5%, saves me $15-57, assuming I'll owe the same amount of deferred income later. Or if used to pay down higher interest debt, could save you more than 5%.

So the question is 1) do you think tax rates will be going up in the future? and 2) will you be in a higher or lower tax bracket during your retirement and 3) do you plan to pass on the ROTH as tax free inheritance?

tooshy: you reminded me of a very good point - that while SBs are currently offering an above-average yield for a "low-risk" investment [the reason I wondered about including them in an IRA], they are redundant in duplicating many of the tax advantages already enjoyed within a Traditional or Roth IRA.

This reminded me of some news reports that some investors who, having been were badly burned by investing most of their IRA assets in high-risk equities, have actually invested some of their proceeds in "safe" investments such as into TAX-EXEMPT state/municipal bonds or TAX-DEFERRED annuities. Somehow, they didn't realize how the duplication of tax-deferred or tax-exempt status substantially lowered their real investment yield.

for the buying a house withdrawal, how does that work... 5 years after the date the IRA was opened.. 5 years after the tax year? let's say I started in March '02, when would I be eligible for withdrawal?

After some reading, I have reached my conclusion that ROTH IRA is definitely better than traditional (deductible) IRA, especially for young people who have many years of contributions ahead. Reason: Under current law, social security benefits paid to retirees are taxable for aggregate income above $25K single/$32K joint (not adjusted for inflation???), therefore mandatory distributions under traditional IRA may bump a retiree's income above these thresholds, in which case social security income would be taxed dollar for dollar above these thresholds. Roth distributions are completely tax free, therefore may offer a decisive advantage for social security recipients. On the other hand, traditional IRAs are completely taxable (principal + interest) and saddled with mandatory distribution after 70-1/2, therefore one should seriously avoid this tax whammy. Although tax laws may change, and social security benefits could become 100% taxable for everyone anyway (instead of means-tested), who knows?

<< Roth distributions are completely tax free, therefore may offer a decisive advantage for social security recipients. On the other hand, traditional IRAs are completely taxable (principal + interest) and saddled with mandatory distribution after 70-1/2, therefore one should seriously avoid this tax whammy. >>

Q. Can I open a joint IRA with my spouse?A. No. Individual Retirement Accounts have to be opened separately, though a spouse can be named as a beneficiary.

Q. Can I make contributions into both a Roth IRA and a Traditional IRA?A. Partly yes, partly no. If your income is within the allowable contribution limits, you could potentially split your annual IRA contributions between a Roth and Traditional. However, the total contributions are still capped (for most people, $3,000 a year). See the IRS regs.

i believe if you are starting out (ie - little to no funds in your ira), its not worth buying stocks given the huge ratio of commission to price. you shoudl stay in cd until you have collected a few years worth of funds.

Mshen raises a very strong point: with small-balance IRA accounts, be very careful about transaction costs and fees related to your investments. Pay particularly close attention to trading commissons and mutual-fund transaction fees on small investment amounts.

If your IRA account balance is modest (i.e. $1500), be careful to avoid brokers like Charles Schwab which ding you with very high fees for low balances or annual custodial fees. Paying a $45 annual custodial fee on a $1500 investment in money-market funds paying 0.5% yield doesn't make economic sense, and totally defeats the concept of saving for one's retirement.

If you are starting out with a small IRA, look for providers who are small-account friendly. Among equity brokers, Scottrade and Sharebuilder seem to be good choices. Among banks, your best choice is probably a local credit union that offers an adequate choice of IRA savings and IRA CD products and low or no annual custodial fees.

I just quit my job and I have a lot of money in my 401k. I am deciding whether to roll over the 401k to my new employer's 401k plan or whether to roll over to a traditional IRA?

I understand that you can borrow up to $50K from the 401k but I am not sure how much you can borrow from a traditional IRA? I would prefer to borrow from the traditional IRA because the loan is not tied to my employment (i.e. with 401k, i have to pay back entire loan amount within 60 days if my employment is terminated for any reason).

kharvel: generally speaking, you can't borrow money from an IRA or use an IRA as loan collateral. As noksagt stated, you have a very limited ability to make a short-term withdrawal but be very, very careful about the rules governing! Otherwise, you can face a very steep tax penalty.

You correctly observe that borrowing from an employer 401(k) account is risky because if your employment ceases, you have to repay the loan within 60 days or face a whopping "premature withdrawal" tax penalty. A lot of people have ignored this fact at their peril.

As IRA season approaches, remember to clearly indicate the TAX YEAR of the contribution with your payment (e.g., on the check memo line) and VERIFY that it is recorded correctly by your financial institution. Some institutions (TD Waterhouse... grrr) default the contribution to the calendar year in which it is made, which may cause you to miss an entire year's worth of contribution room.

<< kharvel: generally speaking, you can't borrow money from an IRA or use an IRA as loan collateral. As noksagt stated, you have a very limited ability to make a short-term withdrawal but be very, very careful about the rules governing! Otherwise, you can face a very steep tax penalty. >>

Sorry if this question is an ignorant one, but I just started researching retirement accounts, please go easy on me

1. In the case of a Roth IRA, you can withdraw ANY amount of your actual contribution at ANY time (after five years), and up to 10K in interest accrued IF it's going towards your first home (after five years).2. It's a no-brainer if you are a student and have minimal income, to open a Roth IRA vs. other IRAs because of tax considerations.

manuel said: Nope. Being capped in one's 401k has no affect on one's eligibility for a IRA.

Happens to people all the time, I'm capped at 9%.

I am confused. You are saying that being capped in 401K does not impact one's eligibility for IRA. Do you mean that one can contribute to an IRA even when you are contributing to a 401K? Do you get tax deductions on contributions made to the IRA as well?

needdealsnow said: manuel said: Nope. Being capped in one's 401k has no affect on one's eligibility for a IRA.

Happens to people all the time, I'm capped at 9%.

I am confused. You are saying that being capped in 401K does not impact one's eligibility for IRA. Do you mean that one can contribute to an IRA even when you are contributing to a 401K? Do you get tax deductions on contributions made to the IRA as well?

N

Yes. However, if you're eligible for 401(k) then the amount you can contribute to a traditional IRA is constrained by your AGI. I think it's phased out completely at 45k. Roths are only phased out completely at 110k.

Say if a person is gonna put 1k in a Vangaurd Roth IRA however they have already done thier taxes, would this do anything to your income/tax return for this year? I know that 1k is trival so should I wait till after the 15th to do it? I like thier target retirement options, makes it a pretty no brain decision.

DamnoIT said: Say if a person is gonna put 1k in a Vangaurd Roth IRA however they have already done thier taxes, would this do anything to your income/tax return for this year? I know that 1k is trival so should I wait till after the 15th to do it? I like thier target retirement options, makes it a pretty no brain decision.

You should probably amend your return to reflect your contribution - you may be eligible for the saver's credit, and I think they need to have a record of when you started making contributions so that they can determine your eligibility for early withdrawals.

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